In the past few years, as Fairfield Greenwich Group has diversified its business away from simply being a Bernie Madoff feeder, it has launched several other funds and funds of funds in addition to its primary Madoff vehicle, Sentry. Madoff’s phantom returns appear to have been critical to the success of many of these funds, too.

Specifically, several of FGG’s funds-of-funds had sizeable positions in FGG’s primary Madoff fund, Fairfield Sentry. (A source says that FGG “seeded” these funds by forcing Sentry investors to take small initial positions in the new funds or else get booted out of the Sentry money machine).

For example, according to recent tearsheets, one FGG fund of funds, Irongate, had 3.3% of its $2.3 billion of assets with Madoff in July. Another FGG fund of funds, Fairfield Investment Fund, had 11% of its assets in Sentry in October (and more exposure to Madoff through other FGG funds).

There are four implications of this:

The performance of FGG’s other funds will also suffer (duh)

The historical fees and gains in FGG’s other funds will be exposed to clawbacks from other swindled Madoff investors (assuming the usual Ponzi legal precedent applies).

These two factors, combined with FGG client horror and revulsion, will likely hasten the stampede of client money out of FGG.

FGG will have to redeem its holdings in other non-bogus hedge funds to meet the flood of redemption requests. This, in turn, will force those hedge funds to sell positions. (We review some of the exposed hedge funds in detail in the next post).

As of now, the FGG funds that were not invested 100% with Bernie Madoff are still solvent. We doubt that they will be a month from now. We continue to think that FGG will be forced to shut its doors by the end of January.

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